This may be one reason why markets are pricing so tight compared to where macro conditions would suggest they should be. There has been no external shock to spook the complacent longs (not yet, at least).

In the GFC, the biggest casualties were commercial real estate and structured credit instruments. As a result, following significant intervention by Central Banks and other regulators, banks now take a lot less risk, have bigger buffers and are much more resilient.

Given its rude health, the banking system is unlikely to be the epicentre of the next systemic risk earthquake. But the risk has arguably just transferred elsewhere, and is now in less visible and less regulated places. Bank risk is more likely to be counterparty-related (see Archegos, possibly Adani) as desks are offering ample leverage on a surprisingly wide range of assets (collateralised fund obligations, anyone?) and not just to sophisticated investors.

There is the question of illiquid assets and how they are packaged, priced and traded. Compared to past crises, are they now more resilient to shocks?

ETFs and REITs are a good examples. They are not suited to sudden, instant withdrawals given the illiquid nature of their underlying assets. So what happens when investors seek to pull their money, all at once?

These sorts of funds have liquidity buffers to deal with sudden withdrawals. But they are often loathe to diminish them, and will often seek to sell the underlying assets instead, which can perpetuate the problem of withdrawals. Gating is a more draconian option, and happens more often than investors would like.

Transparency and pricing is another issue, often the reported valuation does not reflect underlying conditions, there can be quite a time lag between reported and actual values. It might be good to avoid P&L swings and volatility by not having to mark-to-market but investors are often blissfully unaware just how poorly the underlying is performing.

The well publicised problems at BREIT are a case in point. The sharp drop in commercial estate valuations was well known, but the NAV barely moved for months. Like pulling elastic tied to a brick, nothing happens for a while but eventually it will hit you in the face.

Redemptions from this leviathan $69bn vehicle are limited to just 2% of NAV in any given month, and 5% in any given quarter. According to the FT, the BREIT only satisfied 25% of repurchase requests in January. Most were rolled up from past months, after the fund was temporarily gated in December.

As 9fin expands into other fixed-income markets — such as structured credit and private credit — our distressed and restructuring coverage will follow.

Some of these new coverage areas have decent overlap with LevFin (such as the real estate sector) and I’m looking forward to catching up again with securitization sources and unpicking fresh CMBS collapses.

It’s now been more than a decade since I first broke news of Terra Firma’s €5.8bn GRAND German multi-family restructuring (my article is paywalled, but here’s a generic announcement of that situation).

This time around, it’s likely to be more of an equity-hit story than banks being caught out by reckless CRE lending. Still, a 25%-30% reduction in value is not unreasonable, based on expected cap-rate moves.

I’m on less solid ground with private equity and private credit, and their GP and LP mechanisms. But my suspicion is there are more deals in trouble than many think.

After all, unitranche deals are stretched senior with higher leverage than their leveraged loan compatriots, and we understand that most sponsors didn’t hedge their interest-rate risk. In recent weeks, financial advisors have told us that the amount of inbound calls from direct lenders has risen materially.

Even if the public restructuring wave is smaller than expected, seems like there is still plenty to do in private.

A rising margin lifts all boats

We’ve been pontificating for months about what is likely to happen at Hurtigtuten, the Norwegian cruises and expeditions business.

Sources close to the talks had hinted that the sponsor, TDR Capital, remained supportive and that a holistic solution was being prepared — but that the key focus was dealing with the July 2023 maturities. As negotiations with lenders dragged by, several shareholder loans were announced to support the business, with the hope that it would return to profitability in the key 2023 cruise season.

However — as 9fin’s Denitsa Stoyanova outlined in mid-December — while revenues are returning to pre-crisis levels, EBITDA is only around half what it was before.

We had expected TDR Capital to write a sizeable cheque (notwithstanding the cumulative effect of its shareholder loans) but the latest proposal is more driven by its close ally Albacore — which is providing €200m of financing to take out the 2023 maturities, albeit at a significant cost.

The new five-year Albacore facility pays a hefty 600bps cash and 600bps PIK, and ranks pari passu with the existing TLB debt. In addition, there are warrants to the equity (small stake, exact size unknown) for a €17.5m consideration.

TDR’s contribution is €80m of funding (it’s unclear where this sits in the cap stack) including a €25m shareholder loan. The €60m of shareholder loan facilities provided since November 2022 will be fully subordinated or equitised if SFA amendments are agreed by lenders.

Which brings us to:

An A&E of the existing €85m RCF and the €655m TLB is being proposed (Albacore’s funding is not conditional on the A&E getting over the line). It’s a two-years extension, bumping up margins by over 200bps to 625bps and 650bps respectively. Not bad, but still skinny for a stressed credit.

But what about the bonds? Hurtigruten has SSNs and SUNs due in February 2025; after the new money and SFA amendments, they find themselves at the front of the maturity queue, with Albacore at the back, and the TLB in the middle.

Then again, the bonds and the loans are very different animals. With separate sets of vessel collateral, they could easily be dealt with separately and independently.

With expensive Albacore debt, and the term loan margin stepping up by 100bps per year from November 2024, clearly there is an incentive to refinance in the second half of 2024.

The question is whether the business will have de-levered enough by then to refinance. The trading update showed that Hurtigruten turned EBITDA-positive in Q4 22 (albeit to the tune of just €0.5m, and only after a number of normalisation adjustments).

Denitsa’s view is that there is still a lot to prove, and it may be difficult to find a route to refi. Watch out for another update shortly.

We’ve invited the advisors to discuss their thoughts on the business and valuation with us. But in the meantime, they might be praying investors ignore our negative thoughts and assume that a rising margin lifts all boats.

The deadline for lender responses is 14 March.

Adler 2029s push the accelerator

This week’s workout is a little shorter than normal, as we have been distracted by yet more strange events at Adler Group. There was plenty to prep for and we are sitting in court today for their UK Restructuring Plan convening hearing today (it is still going on as you read this).

As reported, a group of 2029 holders are challenging the company’s plan to use €937.5m of senior secured funding (from an ad hoc noteholder group) to repay the 2023 and 2024 maturities of its subsidiary Adler Real Estate.

Advised by FTI and Akin Gump, the group argued that the plan favours short-dated holders, most notably the previously pari passu 2024 Adler Group SUNs (which are to be elevated in ranking).

The 2029 holders then blocked a request for a consent solicitation to allow the financing, but Adler Group had over 75% in total (by value and number) across the six debt issues, and said it had alternative means of implementation. They eventually plumped for the UK Restructuring Plan.

As outlined in last week’s Workout, there are six classes proposed. It might be a stretch to say that the rights of these classes are so dissimilar that they can’t vote together in a single class; and of course, the separate classes mean you can’t have one class voting in favour to cram down. The courts normally frown on artificial class construction, so they may need some convincing here.

In today’s convening hearing, the funds were named as Attestor, Carval, DWS Strategic Investments and SVP. Collectively, they own around €250m of the 2029 SUNs, some 30% of the total face value.

Given the lateness of information disclosure to the 2029 AHG group and their advisors, most of the substantive issues — including some which are normally heard in the opening Convening Hearing — were shifted to Sanction Hearing stage.

This meant that the funds didn’t challenge the formation of the six classes of notes, but would challenge their artificial construction and the effects of doing so, said Tom Quinn KC, representing the group.

But there was no mention in court of a late twist, revealed yesterday evening. Adler said:

“…in the interests of full transparency, that two members of the minority group of holders of AGPS BondCo PLC notes due 2029 have terminated notes of various classes with an aggregate principal amount of approximately EUR 192.8 million.

AGPS BondCo, Adler Group and their respective advisors are of the view that the termination is ineffective and serves primarily to disrupt the stabilisation process that is supported by a large majority of noteholders. AGPS BondCo and Adler Group expressly reserve all rights in connection with the invalid termination, in particular any claims for injunctive relief and damages.”

So what is happening? Why, and on what grounds, are some of the 2029s accelerating their bonds and some of their cross-holdings?

Their skeleton provides some clues, and brainstorming with brighter minds at 9fin we have some theories (hopefully these will be either confirmed or ruled out during the hearings).

The 2029 AHG say in their skeleton:

“In light of the commencement by the Plan Company of the Part 26A procedure, members of the AHG intend to accelerate their 2029 Notes imminently, as they are entitled to do under the terms of the notes.”

So what is the event of default here?

In the 2029 bond docs, under events of default, we have this:

e) insolvency proceedings against the issuer are instituted and have not been discharged or stayed within 90 days, or the Issuer applies for or institutes such proceedings

And as we saw in Gategroup, the UK Restructuring Plan was determined by Justice Zacaroli as an insolvency process.

But is the initiation of a UK RP enough to trigger a EoD? And even if it is, surely the process in itself has an injunctive effect on enforcement?

There is no automatic moratorium under the UK Restructuring Plan. But English courts will typically frown on enforcement during the process, and the company could seek injunctive relief alongside the case. But the 2029s are under German law, and any injunction might not have extra-territorial effect.

The holders are challenging the jurisdiction of the UK Court, arguing that the formation of an English Plan Company (AGPS Bondco) under an issuer substitution mechanism is invalid, and is simply a construct to enable a cross-class cram down.

As the SUNs are governed by German Law, they are subject to the non-exclusive jurisdiction of the German Court, the 29s argue:

A member of the AHG is imminently to commence proceedings in the regional court of Frankfurt (the Landgericht Frankfurt; the German Court) against the Issuer for declarations as to the invalidity of the Issuer Substitution.

They further add that the German court is unlikely to recognise the substitution.

So is this something out of the Galapagos playbook? Could we see a jurisdiction fight and a lack of recognition between the two?

Perhaps. But we might need to wait for more of the substantive arguments to be heard at Sanction hearing stage, which is weeks away.

The 2029s have an impressive KC, Tom Quinn, in their corner; however, due to a conflict he could only attend this morning. The 2029s are asking for directions in today’s hearing, proposing that as there isn’t enough court time to deal with the jurisdiction at the one-day convening hearing this should be dealt with at sanction stage, at a three to four-day hearing.

Notwithstanding the jurisdiction issue, they are also challenging the UK RP on fairness grounds, saying that it is unfair and inequitable. As it is an insolvency process, all SUNs should rank pari passu as unsecured creditors, they argue.

With the stated alternative to the plan being an insolvency proceeding, they should share pro rata in the distribution of the assets, but the 2024s receive a “differential treatment”:

More to come. The case continues (I’ve always wanted to say that!).

Esk-bomb board meant — the end of De Ruyter?

Regular readers will know that in a past life, I spent a lot of time and column inches looking at Eskom, the South African Energy provider. It’s over three-years since myself and Nick Smith-Saville dissected its dire situation in this podcast.

To recap recent news, Eskom is suffering from a going concern opinion, has just failed to get approval for its 33% price increase from the regulator, and is unable to purchase diesel to produce alternative power as its ageing coal plants (and troublesome new ones) fail. This is causing widespread outages, which last month were the worst on record. There is also news of widespread looting of its coal and diesel stocks by organised crime groups.

Eskom (or Eskbomb, as I would like to call it…revised lyrics to Tom Jones’ ‘Sex Bomb’ available on request) has endured corruption, nepotism and political interference for years.

Whether because of politics, economics or ineptitude, it has taken several years for South Africa to come to terms with addressing Eskom’s huge debt burden. As I reported in 2019, just crystalising its contingent liabilities (the government provided interest payment guarantees for most Eskom debt issues, but there is no cross-default) would have resulted in almost a 7% increase in debt-to-GDP and a two notch ratings downgrade.

It’s taken some time to execute a plan to split the business into three (generation, distribution and transmission) and to run the businesses on a commercial basis. It would seek transition and green financing tools to fund the move from dirty coal plants (around 80% of generation). South Africa secured significant finance commitments at the COP summit for this objective.

This week, in the 2023 budget address, South Africa finally announced that it would provide ZAR 254bn ($14bn) of support to Eskom, via bailouts and taking loans on its balance sheet over the next three years, with an additional ZAR 118bn of extra state borrowing.

Outgoing CEO Andre De Ruyter, who was due to leave in a month (he resigned in December, when the energy minister accused him of treason!) was sacked with immediate effect.

He had also claimed an attempted poisoning by someone spiking his coffee, but as the FT wrote this week, police sent to investigate were told he had sinus problems, not a cyanide problem!

In an interview with eNCA, De Ruyter claimed that a high-level politician was involved in corruption at Eskom, but when this issue was raised with a senior minister, they said: “you have to enable some people to eat a bit.”

The ANC has hit back, asking for evidence for his allegations, adding that he was trying to distract from his failings as CEO and was now taking an opportunistic venture into politics.

In brief

Cineworld failed to garner bids for the whole business at first round stage. As we hinted, most were interested in parts of its estate, and the indications of interest didn’t cover the $6bn of debt.

However, in a court session on Tuesday, the cinema group revealed that it hopes to agree a restructuring support agreement (RSA) with its ad hoc group of creditors next week, with the restructuring plan to be filed with the court immediately thereafter.

GenesisCare continues to underperform, with poor numbers to end Dec and insufficient liquidity to last 2023 on its current trajectory, as we revealed this week. A €13m piece of its TLB came up in a BWIC earlier this week; we are chasing to see where it traded, and what the cover was.

News emerged from a couple of zombies this week:

Amigo Loans is struggling to find £45m to ensure its survival, despite being let off of a £75m fine by the FCA given its desperate financial position. It seeking yet another Scheme from its creditors.

Solocal, the French directories business (which like its English peer Yell has been through multiple restructurings) postponed its results release this week.

Atento revealed details around roughly $40m in new financing in an SEC filing earlier this week. The new 2025 senior secured notes carry a 10% cash coupon and 10% PIK interest, payable quarterly.

The notes are secured by receivables of some of Atento’s subsidiaries. The beleaguered call centre operator said earlier this month that it had raised the funding from existing investors, and would use proceeds to pay its burdensome hedge costs.

R-Logitech, the Monaco-based ports and logistics firm, has requested a three-month maturity extension from holders of its 8.5% 2023 SUNs, due 29 March, according to a German Federal Gazette notice reviewed by 9fin.

The company is offering to increase the coupon to 10.25% for the duration of the extension. The maturity extension is intended to give R-Logitech time to conclude financing discussions with a consortium of investors, which will allow it to redeem secured loans at a subsidiary level and source additional funds to finance the redemption of the 2023 SUNs, the company said in a statement.

R-Logitech is advised by Perella Weinberg.

What are we reading, attending, watching this week

As well as reading Martin Wolf’s excellent but depressing The Crisis of Democratic Capitalism, I have started re-reading The President’s Keepers by Jacques Pauw, which exposes the corruption in South Africa under Jacob Zuma’s government (mostly notably at Eskom and other state-owned institutions).

I was lucky enough to be at the book unveiling and a book signing, when suddenly all the lights went out and we were sitting in darkness. We were later told that the sabotage was done by a Eskom employee who was spotted leaving the building just before. You couldn’t make it up!

Thanks also to K&E for their excellent restructuring event yesterday evening, which featured panels on retail and real estate. The attendance was excellent (250 people) and the food (as ever at K&E events) was fantastic. We apologise for the 9fin photo-bombing on socials.

In football news, I was sent this WhatsApp message just after our frustrating 1-0 home defeat by Fulham (just 2 shots to our 17!) from a fellow Brighton fan who is better connected to club insiders than me.

A red card for our Italian manager for “having words” in the tunnel with the referee. His interview in the Guardian shows why the fans love him so much at the Amex:

“I don’t love to win a game like Fulham, but it’s not my problem. Sometimes it’s better to lose one game in this [way] — to play well — than to win in another way. It’s my idea of football, my idea of life. You can’t change my idea.”